Question

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	133,000	$	133,000
Accounts receivable		336,000		486,000
Inventory		567,000		475,000
Plant and equipment, net		824,000		806,000
Investment in Buisson, S.A.		398,000		432,000
Land (undeveloped)		255,000		251,000
Total assets	$	2,513,000	$	2,583,000
Liabilities and Stockholders' Equity
Accounts payable	$	385,000	$	345,000
Long-term debt		1,020,000		1,020,000
Stockholders' equity		1,108,000		1,218,000
Total liabilities and stockholders' equity	$	2,513,000	$	2,583,000

Joel de Paris, Inc. Income Statement
Sales		$	4,136,000
Operating expenses			3,515,600
Net operating income			620,400
Interest and taxes:
Interest expense	$ 119,000
Tax expense	191,000		310,000
Net income		$	310,400

The company paid dividends of $200,400 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. 1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. Margin % Turnover ROI % 2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 19%. What was the company’s residual income last year? Net operating income Minimum required return Residual income

Answer 1

(1) Company’s margin, turnover, and return on investment (ROI) for last year

	Average operating assets	$1,880,000
1	Margin	15%
1	Turnover	2.2
1	ROI	33%
2	Residual income	$ 263,200

	Beginning Balances	Ending Balances
Cash	133,000	133,000
Accounts receivable	336,000	486,000
Inventory	567,000	475,000
Plant and equipment (net)	824,000	806,000
Total operating assets	1,860,000	1,900,000

Average operating assets = ($18,60,000 + 19,,00,000) / 2 = $1,880,000

Margin        = [ Net operating income / Sales ] x 100

                    = [ $6,20,400 / 41,36,000 ] x 100

                   = 15%

Turnover    =Sales / Average operating assets

                   = $41,36,000 / 18,80,000

                    = 2.20

ROI = Margin × Turnover = 15% x 2.2 = 33%

2. Company’s residual income last year

Net operating income	$ 620,400
Less : Minimum required return ($18,80,000 x 19%)	($3,57,200)
Residual income	$ 263,200